SELL recommendation on Vinati Organics - Robust quarter - HDFC Securities

Mr. Nilesh Ghuge, Institutional Research Analyst, HDFC Securities and Mr. Harshad Katkar, Institutional Research Analyst, HDFC Securities

Our SELL recommendation on Vinati Organics with a discounted cash flow- based target price of INR 1,320 (WACC 10%, terminal growth 3.5%) is driven by a shift in the revenue mix towards lower-margin Iso Butyl Benzene (IBB) and Butyl Phenol as compared to ATBS, which has a higher margin. In the absence of a new product pipeline, we believe current valuations are high at ~45/35x FY22/23E EPS. 4Q EBITDA/PAT were 14/10% above estimates, owing to a 20% rise in revenue, offset by higher-than-anticipated operating expenses and lower-than-anticipated other income.

Financial performance: 4Q EBITDA stood at INR 991mn, -3/+38% YoY/QoQ, owing to demand recovery for ATBS and IBB in the quarter. The company has achieved over pre-COVID level volumes in all its product segments. EBITDA margin improved sequentially to 35.4% (41.4/32.3/40.2% in 4QFY20/3QFY21/FY20).

ATBS: Demand for ATBS picked up in 4Q owing to increased crude oil prices. The demand pick-up for ATBS is due to its increased demand by the oil and gas industry that forms 25-30% of its global demand. It contributed 47% to the 4Q topline (38% in 3Q). The brownfield expansion of 14ktpa is commissioned, taking up the total capacity of ATBS to 40ktpa. ATBS traction is very strong, and the company has guided ATBS sales to grow at 80-85% YoY in FY22.

Iso Butyl Benzene (IBB): Revenue contribution came at ~13% in 4Q, owing to excess stock up made by customers in 3Q. The company has guided for a double-digit growth (YoY) in IBB for FY22/23, owing to growing demand for Ibuprofen.

Butyl Phenol: The Butyl Phenol segment clocked in an INR 0.6bn revenue in FY21. Butyl Phenol has started to gain traction and its plant is operating at 50-60% capacity utilisation. The company expects revenue of INR 2.5bn in FY22.

Change in estimates: We raise our FY22/23 EPS estimate by 16.0/37.4% to INR 38.4/49.9 to factor in the positive guidance given by the management for the performance of ATBS, IBB, anti-oxidants and Butyl Phenol in the coming years.

Shares of VINATI ORGANICS LTD. was last trading in BSE at Rs.1810.1 as compared to the previous close of Rs. 1733.65. The total number of shares traded during the day was 28430 in over 2465 trades.

The stock hit an intraday high of Rs. 1816 and intraday low of 1744.85. The net turnover during the day was Rs. 51038426.

Source : Equity Bulls

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